What are the Golden Rules of Accounting?

Financial transactions revolve around the system of dual entry. Every transaction affects at least two
accounts, one is debited and the other one is credited. Golden Rules of Accounting provides the rules
that help in identifying which account needs to be debited and which account needs to be credited. All
the accounts are classified into three major types i.e. Personal, Real & Nominal under the Golden Rules
of Accounting. It provides a set of three principles for these three accounts that allow proper recording of
transactions in the books of accounts. According to the Golden Rules of Accounting, one needs to first
determine the type of accounts affected by each transaction and then apply the principle to record
transactions.
All the accounts are classified into three types under the Golden Rules of Accounting. They are:
1. Personal Account
2. Real Account
3. Nominal Account
1. Personal Account:
The accounts which relate to an individual, group of individuals, firm, company, or institute are
considered to be personal accounts. There are three types of personal accounts:
● Natural Personal Account: Accounts of natural persons i.e. accounts of particular human
beings are considered in this. Eg. Ram A/c, Mohan A/c, Creditors A/c, Debtors A/c, Drawings
A/c Etc.
● Artificial Personal Account: These accounts do not have the physical existence of a human
being but a group of human beings working together is considered to be an Artificial
Personal Account. Eg. Company A/c, Partnership Firm A/c, Bank A/c, Club A/c Etc.
● Representative Personal Account: When an account represents a particular person or
group of persons then it is called a Representative Personal Account.
Rule:
Debit the Receiver, Credit the Giver
It implies that ‘Debit the person’s account who receives something from the business out of a transaction
and Credit the person’s account who gives something to the business’.
2. Real Account:
All the accounts whose value can be measured in monetary terms whether tangible or intangible which
belong to the business are called Real Accounts. There are two types of real accounts:
● Tangible Real Accounts: The real accounts which can be touched, felt, measured,
purchased, sold, etc. Eg. Cash A/c, Stock A/c, Furniture A/c, Machinery A/c, Etc.
● Intangible Real Accounts: The real accounts which can not be touched but their value can
be measured in terms of money. Eg. Goodwill A/c, Patent A/c, Copyright A/c, Trademark A/c
Etc.
Rule:
Debit What Comes in, Credit What Goes out
The rule specifies that any real account which comes into business is debited and any real account which
goes outside the business is credited.
3. Nominal Account:
All the expenses and losses as well as all the incomes and gains come under Nominal Account.
Expenses include Salaries Paid, Rent Paid, Discount Allowed Etc. and Incomes include Commission
Received, Interest Received, Discount Received Etc.
Rule:
Debit all the Expenses and Losses, Credit all the Incomes and Gains
It implies that all the expenses and losses incurred in business are debited and all the income and losses
should be credited.
Illustration:
Classify the nature and types of nature of accounts for the following transactions:
1. Cash received from Sahil ₹10,000.
2. Rent Paid in Cash ₹500.
3. Purchased Machinery for ₹20,000 in Cash.
4. Paid Cash to Sayeba Enterprises ₹5,000.
5. Commission Received in Cash ₹1,000.
Solution:

S.No. Involved Account Affected Account Rule Debit/Credit

Cash Real Account Comes In Debit(Dr.)

1
Sahil Personal Account Giver Credit(Cr.)

Rent Nominal Account Expenses Debit(Dr.)

2
Cash Real Account Goes Out Credit(Cr.)

Machinery Real Account Comes In Debit(Dr.)

Cash Real Account Goes Out Credit(Cr.)

 Cash Real Account Goes Out Credit(Cr.)
4
Sayeba Enterprises Personal Account Receiver Debit(Dr.)

Commission Nominal Account Income Credit(Cr.)

5
Cash Real Account Comes In Debit(Dr.)

Journal Entry Questions and Solutions

Example 1
Pass the necessary journal entries related to the ‘Opening Entry’.
(a) On 1st April 2023, Ram started a business with cash ₹5,00,000.

(b) On 1st April 2023, Vinod started business with cash ₹1,00,000, furniture ₹2,00,000, and Building
₹10,00,000.

(c) On 1st April 2023, Mohan’s Books of Account shows Cash ₹16,000, Stock ₹54,000, Debtors
₹47,000, Furniture ₹42,000, Creditors ₹37,000, and Capital ₹1,22,000.
(d) On 1st April 2023, Amit’s Books of Account shows Cash ₹4,000, Bank ₹10,000, Stock ₹27,000,
Debtors ₹23,500, Land and building ₹30,000, Creditors ₹10,000, and Capital ₹1,00,000.

(e) On 1st April 2023, Vikas’s Books of Account show, Cash ₹30,000, Bank ₹10,000, Stock ₹80,000,
Debtors ₹48,000, Furniture ₹7,200, Creditors ₹25,000, and Bank Loan ₹20,000.
Example 2
Pass the necessary journal entries in the books of Reshi Raj,
(a) On 1 April 2023, Cash Purchases ₹20,000.
(b) On 9 April 2023, Sold goods to Rama at the list price of ₹60,000 at a trade discount of 10%.
(c) On 11 April 2023, Vinod sold goods to us worth ₹30,000 at a 10% trade discount.
(d) On 18 April 2023, Returned goods to Vinod at the list price of ₹2,000.
(e) On 22 April 2023, Paid cash to Vinod ₹24,000 in full settlement.
(f) On 25 April 2023, Rama returned goods of list price ₹10,000.
(g) On 28 April 2023, Rama paid ₹43,000 in full settlement of his account.
Solution:
Example 3
Pass the necessary journal entries in the book of Raghav from the following transactions:
(a) On 1 April 2023, Opened a Bank Account by depositing ₹50,000.
(b) On 7 April 2023, Goods were brought for ₹10,000, and payment was made by cheque.
(c) On 9 April 2023, Ravi (the debtor) directly deposited an amount of ₹40,000 in Raghav’s account.
(d) On 15 April 2023, cash withdrawn ₹5,000 for personal use.
(e) On 21 April 2023, Sold goods to Ankit for ₹30,000 at a cash discount of 10% and received a cheque
for the full amount deposited into the bank the same day.
(f) On 26 April 2023, The cheque received from Ankit was dishonored.
(g) On 29 April 2023, the Bank charged interest for ₹500.
Solution:

Example 4
Pass the necessary journal entries related to the following transactions in the book of R.K. Pvt Ltd.
(a) On 1 April 2023, Purchased goods for cash ₹40,000 and paid ₹2,000 for their carriage.
(b) On 11 April 2023, Amar who owned ₹20,000 declared insolvent.
(c) On 16 April 2023, Machinery bought for ₹5,00,000 and paid ₹25,000 for its installation.
(d) On 19 April 2023, Further paid ₹5,000 on the carriage of the machine bought.
(e) On 24 April 2023, Purchased bricks and timber for ₹10,00,000 for construction of the building and
made payment through cheque.
(f) On 29 April 2023, Amar who was earlier declared insolvent paid 30 paise in Rupee.
Solution:

Example 5
Pass Journal Entries in book Susmita Ltd.:
(a) On 1 April 2023, Susmita got 10% interest on the capital of ₹5,00,000.
(b) On 9 April 2023, Susmita paid 15% interest on drawings of ₹8,000.
(c) On 11 April 2023, the Salary of an employee is due for ₹5,000.
(d) On 13 April 2023, Provide 10% depreciation on machinery costing ₹10,00,000.
(e) On 19 April 2023, Goods for ₹4,000 were distributed as free samples.
(f) On 24 April 2023, Goods worth ₹25,000 were stolen by an employee.
(g) On 27 April 2023, Goods worth ₹3,00,000 were destroyed by fire, and the insurance company paid a
claim for 60% amount.
Solution:
Posting and Balancing of Ledgers
The journal consists of all entries, but what if we are asked about transactions with a particular account?
We can’t count and find the total amount or number of transactions as they are probably done on different
dates. Hence, different accounts are made to record transactions related to that particular account. In the
end, balancing of the ledger is done to get the status of the particular ledger at the end of the financial
year.

Ledger Posting
After the transactions are recorded in the journal, it is then posted in the principal book called as ‘Ledger’.
The process of transferring the entries from journal to respective ledger accounts is called ledger posting.
Balancing of ledgers is carried to find out differences at the end of the year.

Ledger posting is entering information in the ledger, in respective accounts from the journal for individual
records. The account debited is posted on the debit side and the account credited is posted on the credit
side of the same account.

This process is carried throughout the year and at the end of the financial year the ledger accounts are
closed and are totaled and balanced. This process is called the balancing of the ledger accounts.

Understand the concept of Journal Entries here in detail.

Rules for posting of entries in the ledger

A separate account is opened for each account and entries from the journal are posted in respective
ledger account accordingly.
The words like ‘To’ and ‘By’ are used while posting the entries in the ledger accounts. ‘To’ is used when
accounts are posted in the debit side column of a particular account. ‘By’ is used when accounts are
posted in the credit side column of a particular account. These words may not have meaning but are used
to represent the debit and credit accounts.
The account which is debited in the journal should also be debited in the ledger book but the reference
should be of respective credit account.
Balancing of Ledger
Balancing of Ledger

At the end of every accounting year all the accounts which are operated in the ledger book are closed,
totaled and balanced. Balancing of ledgers means finding the difference between the debit and credit
amounts of a particular account i.e. heavier total and lighter total difference and recording that difference
amount on the lighter total side.

Steps for Balancing Ledger Account

First of all, calculate the totals of debit and credit columns separately on a rough sheet to avoid mistakes.
Find out the difference between the heavier total and lighter total by subtracting the lower from higher.
The difference is called a Balance amount.
If the total of the debit side is heavier than that of the credit side, the balance is called as “Debit Balance”
and is written on the credit side (the side with lower amount) of that particular account as “By Balance c/d”
or “By Balance c/FD”. Here, c/d means carried down and c/FD means carried forward.
Similarly, if the total of the credit side is more than that of debit side total, the balance is called “Credit
Balance”. The difference amount is written on the debit side of the account as “To balance c/d” or “To
balance c/fd”
Once we get the heavier total it should be written in both the columns’ total. Draw double lines across the
total below the amounts which indicates the account is closed and balanced.
Last year’s closing balance is the opening balance of the current year. So, if there is debit it should be
shown on the debit side of a particular account as “To Balance b/d” or “To Balance b/fd”. Here, b/d means
brought down and b/fd means brought forward.
Note: Nominal accounts are not balanced; the balances are transferred to profit and loss account.

Standard Ledger Example

Sardar Hammad is sole owner of business. He has been started business since 1990. Following are transaction for
the month of August 2016, prepare Journal Entry, General Ledgers and Trial Balance.

August 2016

Aug 3. Reinvestment in the shape of Cash $80,000 and Furniture $20,000.

Aug 5. Cash Sales $10,000 and on account Sales $12,000.

Aug 6. Bought goods from Ahmed Co. $60,000 paid $15,000 cash and remaining Note payable pay within 30 days.

Aug 9. Purchase Office Equipment from Waseem Shah worth Rupees $99,000, a cash down payment of $19,000 and
balance will be paid by four installments, first due on 30 August.

Aug 21. Goods return by credit customer of worth $12,000.

Aug 30. Paid first installment of $20,000.

Solution: Journal Entry

Solution: Standard Ledger Accounts
Solution: Trial Balance

Sardar Hammad

Trial Balance

As on August 2016

S.N Heads of Account Ref Amount ($)

Debit Credit
1 Cash 36,000

2 Furniture 20,000

3 Owner Equity 100,000

4 Account Receivable -0-

5 Sales 22,000

6 Purchases 60,000

7 Note Payable 45,000

8 Office Equipment 99,000

9 Account Payable 60,000

10 Sales Return 12,000

 Total $227,000 $227,000

>> Practice General Ledger Problems and Solutions.

Running Balance Ledger Example

Rameesha Hafeez & Co. is a boat repair yard. During August 2015, its transactions included the following. You are
required to pass Journal Entry, prepare General Ledger (Running Balance) and Trial Balance.

August 2015
August 3. Loan taken from Habib Bank Ltd. of $25,000. $20,000 withdrawn for business and remaining in the bank
account.
August 6. Paid rent for the month of August $4,400 and accrued rent expenses was $600.
August 12. At request of Kiwi Insurance, Inc, made repairs on boat of Jon Seaways. Sent bill for $5,620 for services
rendered to Kiwi Insurance Inc. (credit Repair Service Revenue).
August 18. Made repairs to boat of Dennis Copper and collected in full the charge of $2,830.
August 20. Placed Advertisement in The Dawn at a cost of $165, payment to be made within 30 days.
August 25. Received a check for $5,620 from Kiwi Insurance Inc representing collection of the receivable of
August 12.
August 30. Sent check to The Dawn in payment of the liability incurred on August 20.

Solution: Journal Entry

Solution: General Ledger Accounts
Solution: Trial Balance
 Rameesha Hafeez & Co.

Trial Balance

As on August 2015

S.N Heads of Account Ref Amount (Rs.)

Debit Credit

1 Cash 18,430

2 Bank 10,455

3 Bank Loan 25,000

4 Rent Expense 5,000

5 Rent Payable 600

6 Account Receivable -0-

7 Repair Services Revenue 8,450

8 Advertising Expense 165

9 Advertising Expense Payable -0-

Total 34,050 34,050